Last week’s release of March export data by USDA’s Foreign Agricultural Service provided the last piece of data needed to know both March exports and the level of domestic pork demand in the U.S. Both stories were very positive, and all available evidence suggests that they remain so. These two demands drive the wholesale demand for pork, which has provided terrific value for pork cuts – and thus hogs this year.
FAS’s product weight data showed that March exports were record large and 1.7% higher than one year ago. March shipments of 247,664 metric tons were also 21.7% higher than those of February. March’s exports bring the year-to-date total to 659,423 metric tons, 6.9% lower than one year ago.
While exports are down this year through the end of March, they are still higher than most analysts expected. As can be seen in Figure 1, shipments to China/HK are still nearly 27% lower than one year ago but we must remember that 2020 exports to China were huge. Weekly data indicate that we will soon be shipping more pork to China than one year ago and beginning to make up for this Q1 shortfall.
Shipments to Mexico are still trailing their 2020 pace by 3.4% but were up 4.8% in March. Japan’s purchases have also grown this year while shipments to the Philippines, which has been besieged by African swine fever, have surged following their government’s decision to increase tariff rate quotas to allow more pork into the country. Shipments to Latin American markets have also grown this year.
Notably, the value of exports in March was up 4.1% year over year. The fact that this figure grew by more than the quantity implies higher prices for March exports. Year-to-date (YTD) prices are still lower than last year but continued exports at today’s higher wholesale values will likely reverse that trend in months to come.
Pork variety meat exports were down 1.1% year over year in March but the value of those exports rose by 10.5% from last year. Year to date through March, variety meat shipments are down 4.8% while their value is up 5%. These gains in variety meat export values are very important as the “drop value” of a carcass is a major component of packer margin. The larger the drop, the more packers can pay for hogs at any given cutout value.
Domestic meat demand, in general, and pork demand, in particular, remained strong in March. Real per capita expenditures (RPCE) for pork, a metric that represents the level of demand, grew by 3.7% year over year, bringing YTD pork RPCE to an increase of 5.3%. The March figure was the result of a 1.7% reduction in domestic per capita availability/disappearance/consumption (largely due to robust exports) and a 5.5% increase in the deflated retail price of pork.
I expect retail pork prices to rise sharply over the next few months as higher wholesale cut costs are passed along to consumers by retailers and restaurants. These firms normally absorb price increases for some time before marking up their sale prices, partly due to feature and advertising commitments but also because they generally do not like raising prices and dealing with irate customers. The forward commitments eventually come to an end and tighter margins eventually incentivize price increases despite customer difficulties. History tells us that the process usually takes 3-4 months, meaning retail price hikes will likely begin by June.
As can be seen in Figure 2, pork RPCE is poised to exceed year-ago levels by very wide margins in April and May due to last year’s coronavirus-related shutdowns that restricted domestic supplies. For comparison, beef RPCE is up 3% YTD while broiler RPCE is up 0.6%. March, though, was the best month so far in 2021 for both competitor species.
So what does this mean and what is in store?
First, strong demand provides profit opportunities for everyone. Producer profits are obvious, even in the face of significantly higher production costs. Packer gross margins have, until the past two weeks, been well above their 5-year averages just as we thought they would be in the wake of operating costs increases for labor, personal protective equipment, COVID-related operational changes, etc. Retail and restaurant margins have likely been squeezed a bit but are still healthy and will return to their normal (and some would argue excessive) levels soon.
Second, this surge started in June last year and, if anything, has gotten stronger. A rebounding economy and significant government stimulus money have helped this surge. In addition, the move from “pork by the serving” in restaurants to “pork by the package” in grocery stores has proven very beneficial. Due to pork’s still-limited exposure on many restaurant menus, consumers have a better opportunity to buy pork in a grocery store where their dollars go further. There could well be some lingering positive impacts of last year’s forced purchasing changes but I am a bit concerned about a switch back to “pork by the serving” this year as foodservice establishments fully reopen.
Finally, pork supplies have played only a small role in this run-up of hog prices. Total Q1 hog slaughter was 3.1% lower than last year on one (1.6%) fewer laughter days. Higher weights left Q1 pork production was down 1.8%. Due to lower year-over-year exports, though, domestic pork availability/ disappearance/consumption was virtually even with last year.
Meanwhile, USDA’s estimated cutout value was 27% higher in Q1. The average net hog price across all purchase methods was 23% higher. Stable demand would have likely yielded little change in pork or hog prices given that the amount of pork available to U.S. consumers was virtually the same.
Year-on-year comparisons of prices and quantities from April forward are basically meaningless given last year’s mayhem.
Source: Steve Meyer, Partners for Production Agriculture, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.